Befega Inc v. Minister of National Revenue, [1972] CTC 197, 72 DTC 6170

Walsh, J:—This is an appeal from a decision of the Tax Appeal Board dated December 16, 1969 confirming the assessment made on October 24, 1966, as slightly modified by reassessment dated February 29, 1968, of appellant’s income tax for the year 1965 whereby the sum of $59,730.12 claimed by the appellant as expenses in the said year was disallowed, resulting in a profit being shown in the amount of $14,660.19 instead of a loss of $45,069.93 as shown in appellant’s tax return. By the subsequent reassessment a further sum of $380.72 shown in appellant’s return as costs of incorporation was also disallowed with the result that the taxable income was increased to $15,040.91 on which taxation in the amount of $1,654.50 was assessed. In the present appeal appellant abandons its objections to the disallowance of the costs of incorporation. The amount of $59,730.12 of disallowed expenses with which the appeal is now concerned was made up of three items:

Mr. Paré being appellant’s legal adviser and Samson Bélair its auditors. The commission of $45,000 was paid to Morgan Trust Company as its charges, at a reduced rate, for finding a lessee and arranging an emphyteutic lease from appellant to the lessee of 99 years duration for certain property of which it acquired the ownership simultaneous to the leasing of same. Payment of the three accounts under dispute was made during the fiscal year of the company ending on July 31, 1965 for services terminating in August 1964 when the emphyteutic lease was signed. While the services of Morgan Trust Company were confined to finding a lessee who would lease the property in question by way of a long term emphyteutic lease and arranging the terms of same, the services of the company’s auditor and solicitor also related to certain other agreements made simultaneously which are inextricably associated with the lease. It is necessary, therefore, to refer to these other agreements.

Three individuals, namely Bernard Dupuis, Gaston Dupuis and Fernand Lareau, owned between them ail the shares of Lucerne Motel Co Ltd and 50% of the shares of Réveillon Restaurant Inc, which was operated by it, the other 50% of the shares of Réveillon Restaurant Inc being owned by the said Lucerne Motel Co Ltd. These two corporations are referred to in the agreement as “the companies”. By virtue of a purchase offer made to the said shareholders on July 9, 1964 and accepted on July 17, 1964, Dobie Holdings Corporation, with whom we are not concerned in the present case, purchased all the shares owned by the said Messrs Dupuis and Mr Lareau in the said Lucerne Motel Co Ltd and Réveillon Restaurant Inc (except for 150 preferred nonvoting shares of Lucerne Motel Co Ltd which were to be redeemed) for the price of $1,420,000. It was made a condition of the sale of the shares, however, that the companies would then sell to the vendors or their nominee all the bare and naked land owned by them but not including any buildings or constructions thereon for the sum of $1,596,050 (clause 8 of Purchase Agreement). It was made a further condition of the sale of the shares that the vendor should then execute in favour of the companies a lease-back of the said land by way of an emphyteutic lease, the terms of which were set out in detail in clause 11 of the said agreement.

The conditions of the said lease, which was to be for 99 years, may be summarized as follows. For the first six months from the date of the closing no rent was to be payable, following which rental would be paid in monthly instalments at the rate of $110,000 per annum for 26 years and 6 months. Commencing on the 28th year and for the next ten years the rent would be varied upwards or downwards on the basis of the cost of living index of the Dominion Bureau of Statistics in accordance with the increase or decrease of the rate from the time of the closing, such increase or decrease not to exceed 25% of $110,000. Thereafter, every ten years rent would be subject to a further escalation or diminution on the basis of the base rental for the preceding ten year period, similarly increased or decreased on the basis of the cost of living index from the rate at the time of the closing but with the increase or decrease to be limited to 10%.

In addition to the rental, the lessee undertook (as is required in an emphyteutic lease) to make specific improvements to the property by the construction of five additional motel rooms before July 1967 to a value of at least $55,000. The lessee is to pay all taxes and assessments, keep the premises insured and at the end of the lease give up the land leased with all buildings erected or to be erected thereon without any compensation whatsoever (again, this is a requirement of an emphyteutic lease). The lessee has the right to transfer and assign the lease to a transferee or assignee who undertakes to assume all the obligations of the lessee under the said emphyieutic lease. By virtue of clause aa, in the event of the sale or transfer of the property under lease or the emphyteutic lease rights of the lessors, the lessees shall have the prior right to purchase same under the same conditions offered by a bona fide purchaser.

The fact that the three agreements (ie the sale of the shares of Lucerne Motel Co Lid and Réveillon Restaurant Inc to Dobie Holdings Corporation, the sale of the naked land by Lucerne Motel Co Ltd to the appellant Befega Inc (which was incorporated by Messrs Dupuis and Mr Lareau for the purpose of carrying out this transaction), and the lease- back of this naked land by the said Befega Inc to Lucerne Motel Co Ltd by emphyteutic lease) must be considered as part and parcel of the same transaction is further emphasized by clause 21 of the agreement, the first paragraph of which reads as follows:

The vendors warrant and agree that in the event that the sale of the naked land herein described by the companies to the vendors or their nominee under the conditions herein set forth, is subjected to an income tax or taxes by the appropriate governmental authorities, instead of being considered as a Capital gain, then in such case, at the option of the purchaser, the vendors shall keep the purchaser and the companies indemnified and/or exonerated from payment of any such tax or taxes which are assessed, in default of which, and subject to and conditional upon repayment by the vendors as hereinafter stated, the present agreement of sale of shares shall be deemed cancelled and all of the said shares of the companies shall be returned to the vendors who shall be obliged to take back the same. The purchaser agrees that in such case and providing the vendors effect repayment as hereinafter set forth, the sale of land by the companies to the vendors herein may be cancelled, and the emphyteutic leaseback shall thereupon be deemed terminated, subject however to such rights as may exist of lessees holding separate emphyteutic leases which have been apportioned as contemplated herein, and which leases shall be respected by the owners of the land;

In order to carry out this basic agreement appellant, Befega Inc was incorporated and by deed dated July 31, 1964 Lucerne Motel Co Ltd sold it the land in question for $1,596,050. By lease dated the same date, appellant then leased the land in question to Lucerne Motel Co Ltd on the terms already agreed to.

By agreement, the evidence given by witnesses testifying before the Tax Appeal Board was made part of the record in this Court, no further evidence being adduced. In his evidence, Mr Marcel Mercier, the companies’ auditor, was very frank in admitting that the procedure adopted was done so because of certain tax advantages, pointing out that if Lucerne Motel and Réveillon Restaurant had sold their assets as such to Dobie Holdings then there wouid have been provincial sales tax on about $500,000 worth of movable property so sold, consisting of the furnishings and equipment of the motel and restaurant and also a problem in connection with the transfer of the name of Lucerne Mote! and Réveillon Restaurant, both of which are well known. The method adopted resulted in obtaining for the Dupuis and Mr Lareau a sort of annuity of $110,000 a year escalating with the cost of living and guaranteed on the property. This is why they refused to sell the assets of the two companies as such and insisted instead on a long term lease.

Appellant contends that the expenditure of $59,730.12, which has been disallowed, was an expense laid out “for the purpose of gaining or producing income from property or a business of the taxpayer” within the meaning of paragraph 12(1)(a) of the Income Tax Act. Alternatively, and without prejudice to this contention, appellant claims to have the right to amortize these expenditures over a period of 40 years commencing with the year 1965 by virtue of paragraph 1100 (1)(b) of the Income Tax Regulations and paragraph 11(1)(a) of the Income Tax Act, read in conjunction with Schedule B, Class 13, and schedule H dealing with leasehold interests. The Minister, for his part, contends that no deductions can be made for these expenditures by virtue of paragraph 12(1 )(b) of the Act which prohibits such deductions in respect of “an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part”, arguing that these expenditures were an outlay or payment on account of capital within the meaning of paragraph 11(1)(a), and further that paragraph 1100(1)(b) of the Regulations does not permit any such allowance in respect of depreciation or depletion.

It would be well at this point to consider the juridical nature of an emphyteutic lease, this being a term not used in the Income Tax Act, but being a type of contract frequently used in the Province of Quebec where the property in question is situated. The basis of the contract is set out in Articles 567 and 568 of the Quebec Civil Code which read as follows:

067. Emphyteusis or emphyteutic lease is a contract by which the proprietor of an immoveable conveys it for a time to another, the lessee subjecting himself to make improvements, to pay the lessor an annual rent, and to such other charges as may be agreed upon.

568. The duration of emphyteusis cannot exceed ninety-nine years and must be for more than nine.

While the lease in question contains these essential elements there is a derogation in it from the provisions of Article 569 which reads:

569. Emphyteusis carries with it alienation; so long as it lasts, the lessee enjoys all the rights attached to the quality of a proprietor. . . .

in that the lessor retains the right to alienate the property itself, always subject to the prior offering of same to Dobie Holdings Corporation on the same conditions.

The effects of an emphyteutic lease, although in an entirely different context, were considered by Noël, J, as he then was, in the case of Nathan Cohen and Hyman Zalkind v MNR, [1967] CTC 254; 67 DTC 5175, in which the lessee was held to be entitled to claim capital cost allowance under Class 3 (buildings) at the rate of 5% instead of under Class 13 (leasehold interests) at the annual rate of one-fortieth of its capital cost on a building already on property acquired by the appellants at a time when the 99-year emphyteutic lease still had 58 years to run. In that case, after referring to various articles of the Quebec Civil Code relating to emphyteusis, the judgment states at page 259 [5179]:

From the above it appears that the emphyteutic lessee in Quebec has not only a right “in personam” in the immoveable leased (as an ordinary lessee has) but a real right although this real right is a partial one only (un droit réel démembré). This right does not, however, make him the owner of the land or give him complete ownership even of the plantations or constructions erected thereon.

The judgment then goes on to consider, however, in what respects the emphyteutic lease in that case derogated from the general rules. The Original lessee under the emphyteutic lease had specifically assigned to the appellants not only the right, title and interest in the lease but also the ten storey stone and brick building erected on the property, and Noël, J therefore concludes at pages 261-62 [5180]:

It therefore appears to me that whatever are the rights of an ordinary emphyteutic lessee in Quebec or whatever difficulties there may be in the common law provinces because ownership of the land carries with it whatever is built thereon, I cannot, on the documents as they stand herein, reach any other conclusion but that the appellants were the proprietors of the building erected on the land owned by the Seminary.

And states further on page 262 [5181]:

Having reached the conclusion that they have a right of proprietorship in this building and not a leasehold interest, they should and are entitled to depreciate their property as a building.

This seems to be almost the converse of the present case where, by derogation from the ordinary rules of emphyteutic leases, the lessors have themselves retained the right to alienate the property subject to the lease and thus have clearly retained ownership of the property. It is of some interest to note, however, that in that case the Minister had recognized that the emphyteutic lease conferred a leasehold interest on the lessees, permitting them to claim capital cost allowance spread over 40 years by virtue of subsection 1100(7) of the Regulations (which was repealed in 1964 and the present paragraph 1100(1)(b), which appellant attempts to use in its alternative argument, substituted therefor).

Appellant’s contention is based on the argument that the commission to the real estate agent and other expenses were incurred with a view to earning income from rental of the property and that the mere fact that the income so earned will continue from year to year for 99 years and thus be of lasting or enduring benefit should not of itself convert these expenses into capital expenditures since, unlike the situation in most of the jurisprudence referred to by counsel for the respondent, they were not laid out to acquire a capital asset but rather as expenses in connection with the obtaining of a long term revenue-producing contract. Counsel for the respondent contended that the lease itself has an existence as a Capital asset even though it is not set up in the books of appellant as such, quite separate and apart from the property which is leased and which does appear on the books of the company at its purchase price of $1,596,050.

The fact that an expenditure is made for the purpose of gaining or producing income does not of itself necessarily make it an income expense as distinct from a capital outlay, however. This is clearly brought out in the judgment of Abbott, J, concurred in by Kerwin, C J and Fauteux, J, in British Columbia Electric Railway Company Limited v MNR, [1958] SCR 133; [1958] CTC 21; 58 DTC 1022, where he states at page 137 [31, 1027-28]:

Since the main purpose of every business undertaking is presumably to make a profit, any expenditure made “for the purpose of gaining or producing income” comes within the terms of Section 12(1)(a) whether it be classified as an income expense or as a Capital outlay.

Once it is determined that a particular expenditure is one made for the purpose of gaining or producing income, in order to compute income tax liability it must next be ascertained whether such disbursement is an income expense or a Capital outlay. The principle underlying such a distinction is, of course, that since for tax purposes income is determined on an annual basis, an income expense is one incurred to earn the income of the particular year in which it is made and should be allowed as a deduction from gross income in that year. Most capital outlays on the other hand may be amortized or written off over a period of years depending upon whether or not the asset in respect of which the outlay is made is one coming within the capital cost allowance regulations made under Section 11(1)(a) of The Income Tax Act.

In that case the appellant under agreement with certain municipalities operated a railway providing both passenger and freight service. It wished to drop the passenger service which was unprofitable and replace it with a bus service, and in order to be relieved of objections to this by the municipalities it agreed to pay $220,000 to them for the improvement of roads, which it attempted to write off as operating expenses over a ten year period. The judgment did not permit this. Locke, J and Cartwright, J, having concluded that the payment in question was to obtain relief from the obligation to maintain a passenger service which they considered as a payment on account of capital in order to be relieved of part of the obligations of the franchise, the acquisition of which had in the first instance been a capital acquisition, and hence a deduction not permitted by paragraph 12(1)(b) of the Act, therefore found it unnecessary to consider whether the payment was made “for the purpose of gaining or producing income from a property” within the meaning of paragraph 12(1)(a). The judgment of Abbott, J, concurred in by Kerwin, C J and Fauteux, J, concluded that the payment was made in connection with appellant’s profit-making operations, since by being relieved of its obligation to operate the unprofitable passenger service while retaining the profitable freight service it was increasing its profits and that therefore the payment was made for the purpose of gaining or producing income within the meaning of paragraph 12(1)(a). It then went on, however, to apply the principle enunciated by Viscount Cave in British Insulated and Helsby Cables, Limited v Atherton ([1926] AC 205 at 214) to the effect that the test of whether an expenditure is one made on account of capital is whether it was made “with a view of bringing into existence an advantage for the enduring benefit of the appellant’s business” and decided that on the facts of the case before them this was so and that therefore it was a capital expenditure. This judgment was referred to with approval by Kerwin, J in Montreal Light, Heat & Power Consolidated v MNR, [1942] SCR 89; [1942] CTC 1; 2 DTC 535, where he says at pages 105-06 [11]:

What happened, in my view, is that there was an application of the profits of a certain year to prevent an annual expense arising thereafter and brings the cases within Viscount Cave’s criterion in British Insulated and Helsby Cables Limited v Atherton ([1926] AC 205 at p 213) of an expenditure made with a view of bringing into existence an advantage for the enduring benefit of the appellants’ business. The expenditures are outlays or payments on account of capital . . . [1]

If we were to substitute the words “obtain an annual revenue” for the words “prevent an annual expense” then Kerwin, J’s judgment would be applicable to the present case.

The dictum of Viscount Cave in the British Insulated and Helsby Cables Limited v Atherton case (supra) has been discussed at length and the effect of it limited in many subsequent cases. In Regent Oil Co Ltd v Strick (Inspector of Taxes), [1966] AC 295, Lord Morris of Borth-y-Gest stated at pages 328-29:

The well-known words of Viscount Cave LC in his speech in British Insulated and Helsby Cables v Atherton ([1926] AC 205, 213) are perhaps so often quoted because in a single sentence reference is made to a number of features or attributes. Some of these may be valuable as pointers some of the time provided it is not assumed that all are useful all the time. It may in some cases be of some significance that a payment is made “once and for all.” This thought was earlier expressed by the Lord President (Lord Dunedin) in Vallambrosa Rubber Co Ltd v Farmer ([1910] SC 519, 525) when he said that

“in a rough way” [the words denote that he was speaking in general terms] “I think it is not a bad criterion of what is capital expenditure, as against — what is income expenditure — to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year.”

The notion of a payment being made “once and for all” may perhaps in some cases suggest the payment of the price of something of a capital nature but like any other individual phrase it must be of only limited application and helpfulness. It must be remembered also, as Lord Dunedin pointed out in the Vallambrosa case, (ibid 524) that it would be wrong to say that each year must be taken absolutely by itself and that nothing could ever be deducted as an expense unless it was purely and solely referable to a profit reaped within the year. The necessary annual outgoing to cover the necessary annual weeding of a rubber estate would seem essentially to be of the nature of a revenue outgoing.

It may further be of some significance, as Viscount Cave pointed out, if as a result of a payment, something is brought into existence which is an “asset or an advantage” and if it is “for the enduring benefit of a trade”.

In the same case, at pages 343-44, Lord Upjohn states:

Of the cases which I must discuss, the first in point of time is British insulated and Helsby Cables v Atherton, ([1926] AC 205, 213, 214) where Viscount Cave LC made his celebrated statement that if an asset or an advantage is brought into existence “for the enduring benefit of a trade . .. there is very good reason (in the absence of special circumstances to an opposite conclusion) for treating such an expenditure as properly attributable . . . to capital.” In many cases this will be a valuable criterion, but it does not help in this case for it only invites the further question, how long does it take to be an “enduring benefit” if you are dealing with a purely long-term trading agreement? I am sure that Lord Cave when he made these observations did not have in mind anything in the nature of a long-term trading agreement. Therefore, I gain no real assistance from that case.

In the case of Anglo-Persian Oil Co Ltd v Dale, 16 TC 253, Lord Hanworth, MR said at page 268:

Lord Cave’s test that where money is spent for an enduring benefit it is capital, seems to leave open doubts as to what is meant by “enduring”.

In Montreal Light, Heat & Power Consolidated v MNR (supra) Duff, CJ stated at page 92 [6]:

I think, moreover, that these disbursements were made for a purpose which falls within the principle enunciated by Lord Cave in the British Insulated and Helsby Cables Ltd v Atherton [1926] AC 295 at p 212; that is to say, the expenditures were made with a view to securing an enduring benefit, the reduction of the cost of borrowed capital over a period of at least fifteen years.

In the recent case of MNR v Algoma Central Railway, [1968] SCR 447; [1968] CTC 161; 68 DTC 5096, Fauteux, J, as he then was, states at pages 449-50 [162, 5097]:

Parliament did not define the expressions “outlay . .. of capital” or “payment on account of capital”. There being no statutory criterion, the application or non-application of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination and agree with the view expressed, in a recent decision of the Privy Council, B P Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia, [1966] AC 224 ([1965] 3 All ER 209) by Lord Pearce. In referring to the matter of determining whether an expenditure was of a capital or an income nature, he said, at p 264:

“The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.”

This case upheld the deduction allowed by Jackett, P, as he then was, of expenditures made by a railway company for geological surveys which it hoped would encourage industry to locate along a rail line which had proved to be unprofitable. The judgment in the Exchequer Court had made a distinction between the information gathered as a direct result of the expenditure, which was not of itself an advantage for the enduring benefit of the taxpayer’s business, and the subsequent exploitation of that knowledge. The SCR headnote reads in part:

In the cases cited in which an expenditure was held to be a payment on account of capital the advantage characterized as productive of an enduring benefit was the thing contracted for or otherwise anticipated by the taxpayer as the direct result of the expenditure. In the present case the information received in consequence of the expenditure was not in itself such an advantage and the appeal was accordingly allowed.

In order for an item of expenditure to be considered as a capital expenditure it is not necessary that it should have been made in order to acquire a tangible asset, itself of a depreciable nature. In the case of MNR v Dominion Natural Gas Company Limited, [1941] SCR 19; [1940-41] CTC 155; 1 DTC 499-133, in which the taxpayer attempted to deduct legal expenses incurred in a successful defence of an attack on his franchise rights, Duff, CJ, in applying the criterion of Viscount Cave, held at page 24 [160]:

The settlement of the issue raised by the proceedings attacking the rights of the respondents with the object of excluding them from carrying on their undertaking within the limits of the City of Hamilton was, I think, an enduring benefit within the sense of Lord Cave’s language. As Lord Macmillan points out in Van Den Berghs Ltd v Clark, [1935] AC 431 at p 440:

“Lord Atknson indicated that the word asset ought not to be confined to something material and, in further elucidation of the principle, Romer LJ has added that the advantage paid for need not be ‘of a positive character’ and may consist in the getting rid of an item of fixed capital that is of an onerous character: Anglo-Persian Oil Co v Dale, [1932] 1 KB at p 146.”

To the same effect the judgment of Kerwin, J in Montreal Light, Heat & Power Consolidated v MNR (supra).* [2]

The Dominion Natural Gas Company judgment was distinguished subsequently by the Supreme Court in MNR v Kellogg Company of Canada, Limited, [1943] SCR 58; [1943] CTC 1; 2 DTC 601. In rendering judgment, Duff, CU said at pages 60-61 [3-4]:

As regards this payment, the question in issue was whether or not the registered trade marks of the plaintiffs in the action were valid trade marks, or, in other words, whether or not the present respondents, The Kellogg Company, and all other members of the public were excluded from the use of the words in respect of which the complaint was made. The right upon which the respondents relied was not a right of property, or an exclusive right of any description, but the right (in common with all other members of the public) to describe their goods in the manner in which they were describing them.

It was pointed out in The Minister of National Revenue v The Dominion Natural Gas Company, supra, at p 25, that in the ordinary course legal expenses are simply current expenditures and deductible as such. The expenditures in question here would appear to fall within this general rule.

Again, in the case of Hudson’s Bay Co v MNR, [1947] Ex CR 130; [1947] CTC 86; 3 DTC 968, Angers, J, after a very thorough analysis of both the British and Canadian jurisprudence, permitted the deduction of legal expenses incurred by a company in the protection of its name by injunction proceedings against a trade competitor who had adopted a similar name, holding at page 176 [137] :

The legal expenses and costs laid out by the appellant to protect its trade name, business and reputation were not incurred with the object of creating or acquiring any new asset but were incurred in the ordinary course of protecting and maintaining its already existing assets. On the other hand, I do not believe that these expenses and costs can be considered as being a Capital outlay or loss.

Counsel for respondent submitted that the appellant, by means of the proceedings instituted in the United States had obtained an enduring asset. I cannot agree with this proposition. There was no new asset brought into existence by these proceedings. The expenses were incurred in the ordinary course of maintaining the already existing assets of the company.

In the light of the foregoing jurisprudence, therefore, I have reached the conclusion that although the commission paid to the Morgan Trust to introduce the tenant and complete the negotiations which led to the emphyteutic lease, and the professional fees paid to appellant’s legal and accounting advisers in connection with this lease and the other agreements inextricably associated with it, were undoubtedly laid out by the taxpayer for the purpose of gaining or producing income within the meaning of paragraph 12(1)(a) of the Act, the emphyteutic lease, whether or not it itself can be considered as forming part of appellant’s capital assets nevertheless resulted in a benefit or advantage of an enduring nature for appellant and the exenses incurred in connection with obtaining this advantage were expenses of a capital nature and, as such, cannot, by virtue of paragraph 11(1)(a) of the Act be deducted in computing appellant’s income save to the extent that this may be allowed by the Regulations.

This then brings us to appellant’s alternative argument that paragraph 1100(1)(b) of the Regulations, which is headed ‘‘Leasehold Interest”, should be applied. This paragraph reads as follows:

1100. (1) Under paragraph (a) of subsection (1) of section 11 of the Act, there is hereby allowed to the taxpayer, in computing his income from a a business or property, as the case may be, deductions for each taxation year equal to

(b) such amount, not exceeding the amount for the year calculated in accordance with Schedule H, as he may claim in respect of the capital cost to him of property of class 13 in Schedule B;

Class 13 of Schedule B is the class applying to property that is leasehold interest and refers to certain exceptions which would not be applicable in the present case. Schedule H sets out at some length the manner of calculating the allowance for a leasehold interest and, in particular, Schedule H reads, in part, as follows:

1. For the purpose of paragraph (b) of subsection (1) of section 1100, the amount that may be deducted in computing the income of a taxpayer for a taxation year in respect of the capital cost of property of class 13 in Schedule B is the lesser of

(a) the aggregate of each amount determined in accordance with section 2 of this Schedule that is a prorated portion of the part of the capital cost to him, incurred in a particular taxation year, of a particular leasehold interest; or

2. Subject to section 3 of this Schedule, the prorated portion for the year of the part of the capital cost, incurred in a particular taxation year, of a particular leasehold interest is the lesser of

(a) one-fifth of that part of the capital cost; or

(b) the amount determined by dividing that part of the capital cost by the number of 12-month periods (not exceeding 40 such periods) falling within the period commencing with the beginning of the particular taxation year in which the capital cost was incurred and ending with the day the lease is to terminate.

It is on the basis of this that appellant claims that it should be allowed to amortize the capital cost of the expenses incurred to obtain this lease over a period of 40 years, charging one-fortieth each year against the rental revenue for the first 40 years of the lease.

In order to apply Schedule H, however, the property must fall within Class 13 of Schedule B. It would appear that the term “leasehold interest” would include the rights acquired by a lessee in Quebec by virtue of an emphyteutic lease. This was the Minister’s contention in the case of Nathan Cohen and Hyman Zalkind v MNR (supra) and although the judgment held that the building should not be depreciated as a leasehold interest under Class 13 but rather as a building under Class 3, since in view of the terms of the lease the appellants’ interest was not that of a leaseholder but that of an owner, this case is not authority for the proposition that an emphyteutic lease does not confer rights in the nature of a leasehold interest. The definitions in various English-French dictionaries, while not binding on the Court, lend credence to the view that an emphyteutic lease creates a leasehold interest for the lessee. Harrap’s Standard French and English Dictionary (1955) Vol 2, English-French, page 696 defines “leasehold” in French as:

a) tenure à bail, esp. tenure en vertu d’un bail emphytéotique;

b) propriété, immeuble loués à bail.

L C Clifton et A Grimaux, Nouveau Dictionnaire Anglais-Français et Français-Anglais defines “leasehold” as:

tenure par bail à terme — tenure par bail emphytéotique.

Th A Quemner Dictionnaire Juridique Anglais-Français (1955) defines “leasehold” as:

bien-fonds loué à bail — tenure en vertu d’un bail emphytéotique.

It would appear, however, that the term “leasehold interest” as used in the heading of paragraph 1100(1 )(b) of the Regulations and in Schedule B, Class 13, and Schedule H, refers to the leasehold interest of the lessee in the property. In this interpretation the lessor has granted a lease of the property to the lessee but it is only the lessee who has a “leasehold interest” in the property. All of the jurisprudence cited deals with claims by a lessee for capital cost allowance in connection with its leasehold interest. For example, in the case of Gateway Lodge Limited v MNR, [1967] 2 Ex CR 326; [1967] CTC 199; 67 DTC 5138, although the judgment dealt with another point, namely the claim for terminal allowance on surrender of the lease under subsection 1100(2) of the Regulations, Jackett, P, as he then was, stated at page 334 [206, 5142]:

In the first place, having regard to the definition of the relevant classes, it seems clear that the appellant’s leasehold interest in the land, of which the buildings formed, in the view of the law, a part, falls within prescribed Class 13 and not within prescribed Class 6. Class 6 extends only to property “not included in any other class’’ that is a building and the appellant’s leasehold interest clearly falls within Class 13.

Here the leasehold interest referred to was that of the lessee. See also Louis Reitman v MNR, [1967] CTC 368; 67 DTC 5253, in which the lessee, under a 99-year lease, was found by Dumoulin, J to hold only an interest in a lease and not an interest in a building, and that his interest therefore fell to be depreciated as Class 13 property, amortizable over 40 years, and not as Class 3 property. This case discussed the judgment of Noël, J in Nathan Cohen and Hyman Zalkind v MNR (supra) and agreed with it in view of the differences between the Quebec laws of emphyteusis under which it was decided, and the common law which was applicable to the long-term lease in issue before Dumoulin, J. See also James A McLean, Executor under the Will of Charles Harold Jaimet v MNR, [1965] CTC 530; 66 DTC 5003, in which Gibson, J, in an estate tax case, dealt with the value of a leasehold interest to a lessee.

If any further indication were required to establish that leasehold interest is not something which vests in the lessor but only in the lessee, it is interesting to note the French translation of subsection 1102(5) of the Regulations, which regulation is not applicable in the present case, but in which the words “where the taxpayer has a leasehold interest in a property” have been translated in the French version as “lorsque le contribuable est locataire à bail de biens” (italics mine), thus indicating that the term “leasehold interest” has reference to the interest of a lessee.

This alternative ground of appeal must therefore also fail, and there is no other regulation by virtue of which expenditures incurred by appellant in connection with the emphyteutic lese can be written off against the revenue obtained from it. While in its practical consequence this is unfortunate from the point of view of the appellant, many instances can be found of capital expenditures which cannot be written off under any sections of the Act or Regulations, despite the fact that they contribute to earning income over a long period of time for the taxpayer.

Appellant’s appeal is therefore dismissed, with costs.